Ben Bernanke has once again said “No QE for now, but we are not out of the woods”. Observers need to wise up to the fact that this is a man who knows he must hold his fire, for far worse is coming.

Despite this, JP Morgan and Bank of America seem to have passed the Federal Reserve’s stress tests. JPM I can get behind, but BoA? Stress tests, I increasingly believe, are so-called because they are primarily designed to reduce global investor stress.

It would be good to feel that the European Troika knows what is down the road. I’m sure Lagarde does, but the rest leave me more convinced than ever that rising to top positions has very little to do with creative talent. There was much talk today in Brussels of slapping Spain’s Rajoy down, with the IMF declaring that Portugal is ‘on track’. There was in turn further gobblegaggle on the subject of Greece now undershooting its 2020 deficit target. Mind you, it was Wolfie Strangelove who said this, so we must judge the observation for what it is: unmitigated bollocks.

Jens Weidmann of the German Bundesbank continues to be a thorn in Mario Draghi’s side. Just when the Italian Stallion thinks he’s got away with another scam, Herr Weidmann bashes him with more statistics to demonstrate what a dangerous game the ECB is playing. Today – in a bid to ram home the message as loudly as possible – Jens reported that Bundesbank profits had fallen from €2.2bn in 2010 to just €643m in 2011 “after substantially increasing reserves set aside to cover risks associated with the ECB’s crisis-fighting measures”. Take that, you Dummkopf Schweinhund.

Meanwhile, the EU’s FinMin agreed to suspend transfers to Hungary of its share of funds for poorer countries on the grounds that it had dared to contradict a Sprout edict. The UK, Austria and Poland thought this was a bit heavy, so the compromise is that the funds could be reinstated in June if FinMin ‘determines that the government is working to bring its budget policies in line with EU rules’. Orders vill be obeyed at all timess.

Still no news on the hard-to-explain-away 107 bn euro pot of further Greek liabilities. Or indeed on the fact that the EU is sticking very strictly indeed to a policy of bailing Athens out with worthless paper. Or indeed on the subject of all those deal-dependent things that the Athens government hasn’t done as yet. As long as the ‘bailout’ is being funded with toilet-tissue, I’m sure the Eurocrats will be happy to go along with it. But my water tells me Venizelos is in for an imminent kidney-punch.

China is slowing down while trying to grapple with the wriggling dragon formerly known as the property market. It’s also dumping Dollar debt as fast as it can, as the Currency Wars that Jim O’Neill says don’t exist continue to escalate. Nobody seems to have given a lot of MSM thought to how the US will borrow if that policy continues. Beijing must not, of course, sew up the mouth that devours its output. But I continue to wonder what America will do when China achieves a degree of self-sufficiency, and then decides to focus 100% on supplying its own population with what it needs to become eternally placid.

The West in general – and former Goldman Sachs employees in particular – continue to pin their hopes on inflationary subterfuge that will eventually dilute the obscene debt. The chances of them doing this without Chinese retaliation are zero. But rather more to the point, if (in the act of trying to dilute debt) you let loose funny money to the value of ten times global GDP, who will benefit?

The short answer is ‘Nobody’. But we are dealing with Masters of the Universe here: we must not intervene, for they know what they are at, whereas we are mere mortals unable to understand their mysterious ways.

Perhaps a bit heavy on the irony pedal there. However, the reality is that contagion will escape, banks will not be prepared for a wall of monetising requirements, and by the end of 2013 at the very latest the entire Hollywood-set facade-folly will have crashed to the ground. For all I know, it may do so the week after next. Nobody knows. Let’s face it: if anyone did, they wouldn’t be arsing about writing blogs like this one.

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33 thoughts on “The economic World is much closer to the edge than the Commentariat realises”

Great piece John. you missed out the possibility of a few wars that could shake it all up, as the west launches it ‘operation finding kony’ in syria, iran, nigeria and anywhere else that has resources.

Also the sun, yep that object in the sky, might have a thing or two to say before all this is over.

As to when I agree nobody knows, or maybe some do and we will only know when they pull the plug. But for now all is rosy in our centrally planned world and TMOTU are out eating caviar, drinking vintage wine, and wondering what little sods they can screw over next.

“loose funny money to the value of ten times global GDP.”
And they truly believe they’re so clever they’ll be able to ride it out in Switzerland or Singapore.
I think they’ll end up building the Newt Gingrich space colony on the moon and sit up there telling each other how amazingly rich they are.

I would dearly love to see it all come tumbling down. We’ve spent so long readying for the moment of truth i’d now like to get to the day after when we start picking up the pieces and attempt to make a fresh start.

It’s been said here before, the morning after the crash the sunay shine, a woman will be selling eggs at the local market, the world will turn and life will continue, albeit transformed in ways we aren’t able to predict. Some for the better, some not.

Be careful what you wish for. Under such a scenario, more ruthless and virulent tyrants-in-waiting will find the new environment ripe for exploitation. In no time at all, you will be wishing for the good old days where the tyrants where only concerned with feathering their own nests, not burning down yours.

I hear what you say Chris, but not so sure that in the final wash up we little folk don’t vanish down the plug hole with the real big hunks of dirt. Arr, what the hell, hit the go button, let’s just see where the cards fall.

I thought the whole point about a Black Swan was that you couldn’t predict them, only try to backwardly “explain” them after the event, indeed people always try to do this after such an event. So by defintion Ron Paul cannot be the new black swan!

I’m not sure what the coming collapse will look like here in the western part of the United States but I’m thinking it would be something along the line of Somalia. I’m always polite to my rural neighbors because some day one of them could become my warlord.

So many things could go wrong that I doubt anyone knows what the next 9 months holds.

What will happen to the price of oil (and the western economies) if Syria explodes properly? Or Israel attacks Iran? Or the general regional unrest topples the House of Saud? Or Iraq plunges back into chaos? Or Libya does actually partition by force? Or Egypt erupts again?

What happens to western economies if we have a half-decent solar CME (along the lines of 1859) and it shuts down the internet and mobile phone network for a week? Or even more?

What happens if the drought in the UK’s London & south-east worsens and industry – offices as well as factories, have to work a reduced week?

What happens if the Greeks need yet another bail-out this year? Along with Spain and Portugal and possibly even Ireland?

What happens oif Sarkozy loses? Or wins? Ditto Merkel and Obama.

Will the UK Coalition survive intact until Christmas?

All of these things are more than possible – many inter-related in that one will exacerbate the other in a domino reaction.

I think we established earlier today that it’s USD 107 billion, not EUR 107 billion. Whatever, it’s still a lot of billions of debt that no one wants to talks about.

“China is slowing down…”

Brazil too, partly because of China.

John, when I read your essays like this, I find it astonishing that the EU political elites are still in denial about the elephant in the room which is rampaging and destroying the lives of millions of people. The EU & EZ must be brought to an end forthwith – it’s no longer optional, or there’ll be Europe-wide unrest and God only knows what. That’s my view…

I rather think its not the EU and EZ that must be put to an end, it’s rather their psychological dissociative pathology concerning a heretofore lacking fiscal integration caused in large part by how difficult this is and has been politically. The unwillingness or inability to address these issues is the real elephant in the room and also the cause of more and more rather than less debt and thus more real social suffering.

Perhaps we’re not so far apart. You may simply have concluded that the above mentioned political problems are inherently intractable. There’s certainly much to support that pov from recent behavior. But sometimes when things get bad enough ‘the adults’ are able to do something, finally.

Nothing about it is simple. It is all taking place before a backdrop of globalization done ‘in real time’ where many of the emerging versus developed play by very very different rules: so ‘fair’, as in ‘trade’ has become a whimsical if not undefinable concept dating back to economic theologists of … Chicago school … Freidmann … or magical notions of ‘unseen hands.’ What goes on behaviorally in the ‘markets’ since they’ve become deregulated and hyper-automatized is predatory plunder enough to drive history’s worst buccaneers and highwaymen to extremes of envy and aggression they could scarcely have ever guessed at. And that has been somehow unwittingly superimposed on everyday life and economy.

But there are, I would argue, things that could be done to tame away much of that.

@geo:
“You may simply have concluded that the above mentioned political problems are inherently intractable.”

Exactly. One of the EZ problems is that there’s a huge productivity gap between EZ member states and no amount of political discussion can resolve that. The only solution to it is FULL political AND fiscal union, resulting in ongoing fiscal transfers from north to south, EuroBonds and annual budgets sign-off by Brussels to enforce compliance with rules created and enforced by unelected crats in Brussels.

The electorates in the north will not accept any of that.

That is why I believe the EZ must be brought to an end or perhaps scaled down to countries with like-economies. Even then I’d not recommend it. That will fundamentally change the whole purpose of the EU.
However poorly EZ members were doing before they joined the EZ, they are doing far worse now (or soon will be) through lack of control over their own currencies and interest rates etc. Virtually every currency union in history has collapsed.

Working on the assumption that “cutting and running” is often a feasible option, especially in a hopeless situation – and endlessly rehearsed by the military as a ‘tactical retreat’ – if the Germans were to chuck it in during the coming Easter festivities, which are only some 3 weeks away, it would be an ideal time to do so.

Should the announcement be made on Thursday evening, they would then have 4 clear days to get everything in place ready for the banks opening again on the following Tuesday morning. Bank staff might not be over-chuffed, but who cares about them? German employment law does contain provisions for such eventualities – and the overtime pay might be welcome as well!

If nothing else, it would secure Geli’s reelection next year. Are the Cloggies, Finns and Austrians likely to tag along? Surely that is something that also cannot be excluded.

As for the contention that such an action would do Germany far more financial damage than good, I’d be very much inclined to doubt that.

Firstly, MUCH has been made lately of the simple fact that Germany exports considerably more to non-Euro countries than it does into the Eurozone. If they are not buying now, then what will the the case some 5 – 10 years down the road.

Secondly, this quote, published in the NYT, and from the link –

“Bernard Connolly, a persistent critic of Europe, estimates it would cost Germany, as the main surplus-generating country in the euro area, about 7 percent of its annual gross domestic product over several years to transfer sufficient funds to bail out Europe’s debt-burdened countries, including France.

That amount, he has argued, would far surpass the huge reparations bill foisted upon Germany by the victorious powers after World War I, the final payment of which Germany made in 2010.”

Thirdly, as someone on DMN pointed out the other day, the funds owed to the Bundesbank under Target2 will still be owed even if Germany does leave the Euronzone. And they don’t necessarily have to accept toilet paper in repayment – agricultural produce and locally manufactured goods would also be welcome. As JW puts it:

“….. as a form of barter, everything now has to have a value.”

As for their ‘reputation’ – it may well go up rather than down. There are, and have been, more than enough pundits around the place exhorting them to leave – are they likely to do an about face themselves? And after all, it’s not as if the Germans are the current flavour of the week – until the holiday season kicks off, that is.

I do wonder at the Americans sometimes. BoA was reported to have moved several dollars worth of toxic derivatives onto their taxpayer-backed arm.

That and they did it in broad daylight, the regulator gazing at them from the end of its well fastened chain. Not a woof did it sound. More a groan perhaps? What could a regulator do in such unregulated circumstances? After all, BoA was not allowed to do what it did, but they still did. More importantly, they got away with it. Anyway, it was only a few dollars. In Mugabenomics, anything less than $500tn is worthless. Anything more is worthless too.

Gemz,
The question is which regulator was watching?
The Fed encouraged BoA to transfer the derivatives to the banking arm so that it would not have to pick up the pieces.
The FDIC protested about the transfer because it would have to pick up the pieces.
So, there you have it, two regulators, the Fed, which had the power to veto sub-prime mortgage produects ( under Greenspan) but refused to do so because it was against therir ideology, and the FDIC which has far less clout in the hallowed halls of Washington. Maybe the FDIC should pick up some Goldmans alumni? Seems to be working everywhere else I look!

I have a little thought experiment for you: imagine that however the crash plays out, it’s just happened recently. Now think back to what John and others are writing and what your own senses are telling you. Then ask yourself–did you see it coming? Was there plenty of evidence that we were for the dark? And the answer? For me is, Hell Yeah!

Great piece.
UK readers may want to visit shadowstats.com
There is a detailed report on the coming collapse.
The absolute end date is 2014 ,but as they say any black swan
event could precipitate a sooner demise.
There appears to be a flock of potential swans out there.
Good luck everyone !

For China to cease exporting and start consuming, its citizens would have to cease expanding their dollar holdings, and draw them down.

But the dollars strength is maintained by those holdings, and Chinas voracious appetite for ever more dollars.

If Chinas becomes a net seller, the dollar will tank, Chinas savings will be gone, China has nothing to draw down to feed its consumption plan, and the fallen dollar reintroduces Americans to the global workforce.